The Family Business

Abstract

The family business is an economically relevant worldwide phenomenon. It is widespread in every industry and it takes diverse legal forms, ranging from micro, small and medium sized firms to large public companies. Its economic relevance frequently impacts more than half of the national GDP and it becomes an essential source of employment. After, presenting some facts and figures about the family business around the world, this chapter shows the two main approaches used to define a family firm, namely the essence and component approaches. We thus review more than 180 definitions of family firms and organise them within a table according to the following three main criteria: (1) Percentage of ownership held by the family, (2) Members of the family involved in management and control positions, and (3) Generational stages of the family firm. The intersection of these three criteria gives rise to other four groups of family firm definitions, theoretically proving the multidimensionality of the phenomenon. We then review the studies on family business and accounting and discuss the main theoretical framework used, with a specific focus on the transition from a mainly agency theory-based literature to the derived socioemotional wealth theory. Finally, this chapter pinpoints some early conclusions on the family business providing a bridge with the ensuing chapter stressing the relations between family firms and accounting choices.

The members of a descendent group and their kin own or control at least 5% of the voting stock and are represented on the board of directors. Alternative there is the direct family control and the CEO is a member of the controlling family

A FF is a system comprising four subsystems: (1) the business as an entity, (2) the family as an entity, (3) the founder as an entity, and (4) such linking organizations as the board of directors. Each subsystem has its own culture, identity, needs and values

More than 50% of the voting shares are controlled by 1 family, and/or a single family group effectively controls the firm, and/or a significant proportion of the firm’s senior management is from the same family

A firm is defined FF when: (1) The ownership resides completely with family members; (2) at least 1 owner is employed in the firm; and (3) another family member is either employed in the firm or regularly helps out even if not officially employed

A firm is defined FF in the broadest sense (A) when: A1. The family exercises effective control over strategic direction, and A2. The firm is intended to remain in the family. In the middle sense (B) when, besides all the criteria of the broadest group (B1. The family exercises effective control over strategic direction, and B2. The firm is intended to remain in the family), B3. The founder or descendant manages the firm. In the narrowest sense (C) requires: C1. Family ownership; C2. Multiple generations involved; C3. Direct family involvement in daily operations; and C4. At least 2 family members with significant management responsibility

The sum of: (1) % of family ownership; (2) % of family members on supervisory board; and (3) % of family members in management is higher than 100%. It is required that the family owns at least some shares

The founder and the immediate family own a fractional equity ownership. Other definitions used are: the founder and the immediate family own a fractional equity ownership and is (are) members of board of directors; the founder and the immediate family own a fractional equity ownership and size of the family’s ownership stake relative to other block holders/the founder and the immediate family own a fractional equity ownership and family equity holdings as a fraction of outstanding shares

In the broadest sense (A): (A1) The family has some participation in the firm; and (A2) The family controls the firm’s strategic direction

In the middle sense (B), besides all the criteria of the broadest group: (B1) The family has some participation in the firm, (B2) The family controls the firm strategic direction, (B3) The owner intends to pass the business on to another family member; (B4) The founder or descendant plays a role in the firm management

The narrowest sense (C) requires: (C1) Family ownership; (C2) Multiple generations involved; and (C3) At least 2 family members with significant management responsibility

Two conditions are satisfied: (1) 2 or more directors have a family relationship; and (2) The family owns or controls at least 5% of the voting stock. Other definitions used: there is family control and CEO is a family member/the percentage of family equity ownership/there is family control and family member(s) are on the compensation committee

There exists a fractional equity ownership of the founding family and/or the presence of family members serving on the board of directors. Other definitions used: the ratio of board seats held by family members to board seats held by independent directors/if family board control exceeds independent director control

It is created by entrepreneurs. Other definitions used: firm’s key leader has inner circle members who are immediate family members/firm’s key leader has inner circle members with prior social relationships—distant relatives, in-laws, friends, classmates, colleagues, business partners

The firm’s control (50.1% of shares or voting rights) is closely held by the members of the same family. When only 1 person of the family owns the control, they consider the firm as a family firm only if at least another family person is involved in the firm’s activities

The family is the largest shareholder (cut-off 10% of ownership rights) and the family controls more than 51% of direct voting rights or controls more than double the direct voting rights of the second largest shareholder. Other definitions used: firm run by family CEO/firm run by non-family CEO but 1 family member is on board/family firm when founder or descendent of founder runs firm

Alternatively one of the four following criteria is satisfied: (1) The largest controlling shareholder holding at least 10% of the voting rights is a family, an individual, or an unlisted firm; (2) The family controlling shareholder is an unlisted firm which are closely held and therefore considered as one form of family control; (3) The largest controlling shareholder is an identified family or individual, but excludes unlisted firms as well as family-managed firms from the family definition; (4) The controlling shareholder is a family or an individual who holds the CEO, Honorary Chairman, Chairman, or Vice Chairman position

It meets the following criteria: (1) it was founded prior to 1971 (a generation back); (2) it exhibits at least one of the following (a) 2 or more individuals related by blood are directors, officers, or shareholders (b) an individual has at least 5% ownership (c) a founder is an executive or director, and (3) a management change occurred during the time window considered. Furthermore, a family succession was coded within this sample of firms when the new CEO was related by blood or marriage to: (1) the departing CEO, (2) the founder, or (3) a large shareholder

The founder or a member of his/her family by either blood or marriage is an officer, director, or the owner of at least 5% of the firm’s equity, either individually or as a group. Other definitions used: 1 or more family members are officers directors or block holders/at least 1 family officer and 1 family director/family is largest vote holder/family is largest shareholder/1 or more family members from 2nd generation or later are officers, directors, or block holders/family is largest vote holder and has at least 1 family officer and 1 family director/family is largest shareholder and has at least 20% of the votes/1 or more family members are directors or block holders but there are no family officers/family is largest vote holder, has at least 20% of votes, 1 family officer and 1 family director and is in 2nd or later generation

(1) The family is the largest shareholder and all the members are 2nd generation or beyond; (2) The family is the largest shareholder with additionally a family CEO; (3) The family is the largest shareholder with additionally a family CEO selected as the eldest male child

(1) A single family controls the company’s ownership through at least 10% of the voting rights; (2) The family is active in top management; and (3) 2 or more generations involved, or seem likely to be involved

It is “governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families” (Chua et al. 1999). The concept is operationalized with: (1) percentage of the business owned by family members; (2) number of family managers; and (3) expectation that the future successor as president of the business will be a family member

(1) There exist family relationships between members of the executive team impacting strategic decisions; (2) A significant portion of the firm is owned by the family; and (3) The level of agreement on the shared strategic vision between the non-family and the family team members is measured as a proxy for the allied intentions of the executive team with those of the family who manages and owns the firm

It satisfies one of the following criteria: (1) The ownership is clearly controlled (electing more than half the board members) by a family, where family members participate as members in the board of directors and/or top management; (2) The ownership is clearly controlled (electing more than half the board members) by a group of 2–4 families, where members of these families are also members of the board of directors

1 or more family members are involved as major owners (at least 5% of the equity) or insiders (officers or directors), either contemporaneously or over time. Alternative definitions used indicate a FF when it has family members at the first generation stage or it has family members from at least 1 generation beyond the first

The family is the largest shareholder and/or family members hold management positions. (1) FFs with strong control are those where family members hold top management positions and are among the main shareholders; (2) FFs with weak control are those where family members do not hold top management positions but are among the main shareholders, or those where family members hold top management positions but are not among the main shareholders

It satisfies at least one of the following two criteria: (1) The founder and/or family members hold more than 25% of the voting shares; or (b) If the founding-family owns less than 25% of the voting rights, then family members must be represented on either the executive or the supervisory board

The founder managing the firm responded that a few of their heirs were working in the company, and when the founder was no longer managing the firm they responded that the current management are their heirs

The family exercises control through ownership or through its involvement in management (fraction of top executive positions filled by members of the controlling families, including among those positions the board and the CEO)

The family exercises influence through: (1) Percentage of the equity owned by family members; (2) No. of family managers; and (3) Expectation that the future successor as president of the firm will be a family member

The family owns more than 5% of equity and at least 1 family member is on the board of directors. Other definitions used are: the family owns more than 5% ownership and at least 2 family members are on the board of directors; family shareholdings and at least 1 family member on the board of directors; family shareholdings and at least 2 family members on the board

It ranges on a continuum of values between two extremes: a family-first value orientation on one pole and a business-first value orientation on the other pole. In the middle of the continuum there is a balanced system and two less extreme kinds are located on each side. Hence, a total of 5 kinds of FFs emerge: a balanced one, two that favour the family system, and two that favour the business system

It is possible to discern the “family point of view” which derives from (a) Collaborative dialogue, which helps developing agreement to ethical norms; (b) Ethical norms further helping to cultivate; and (c) Family social capital

One of the following criteria is satisfied: (1) If the group was clearly associated with a FF, the firms constituting it were considered to be family-controlled firms; (2) If a company was not a member of any of these groups, but it was controlled at the senior management level by 1 or more members of a family-controlled firm; (3) A firm which does not belong to any group was classified as a family-controlled firm if its board of directors was controlled by 1 or more members of a family

There is family commitment which is measured in relation to the involvement of members of the owner family in the firm’s management: (1) The managing director is a member of the owner’s family; (2) More than half the members of the top management team belong to the owner’s family; and (3) The firm’s long-term strategy and guidelines are essentially designed by family members

The following 2 criteria are jointly satisfied: (1) Ownership (objective criterion under which it was asked whether “1 family or more had the control of the ownership of the business”); and (2) Self-definition (subjective criterion under which the highest executive was asked whether “their business could be considered a family firm”)

The total F-PEC score is higher than 0.5. More specifically, firms with F-PEC scores from 0.5 to 1 are classified as weak family owned businesses, those with F-PEC scores from 1 to 1.5 may be considered normal family owned businesses, while firms with F-PEC scores higher than 1.5 are strong family owned businesses. The total F-PEC score derives from the algebraic sum of: (1) The equity share owned by the family; (2) The percentage of family members or members interconnected with the family on the board of directors; and (3) The percentage of family members or members interconnected with the family on the supervisory board

There is a known link to the family of the founding owner(s) through a direct shareholding (in the declaration of control to the Banking and Finance Commission it is clearly stated that the shareholder is a family group). Also a FF is a firm where the ultimate owner is a family

Three dimensions of family influence are accomplished: F-Power, F-Experience, and F-Culture. The dimension F-Power, indicating family business governance, was measured with three items: (1) The percentage of shares in the hands of the family members; (2) the percentage of family members in the firm’s management; and (3) The percentage of family members on the board. The dimension F-Experience was measured with three items: (1) The generation of the family owning the company; (2) The generation of the family managing the company; and (3) The generation active on the governance board. The dimension F-Culture, indicating the family’s commitment, loyalty, and pride towards the company, was measured with 13 items

A firm is defined FF when: (1) 1 family owns at least 50% of the firm; (2) The members of the controlling family manage the firm; and (3) The future president is expected to be a member of the controlling family

The surveyed firms have 2 or more firm directors with the same last name or the firm is named after 1 of its directors, which indirectly gives an indication of the occurrence of family involvement in these firms. A firm was further expected to be a FF if 2 or more directors resided at the same address or when at least 1 of the directors resided at the business address. The selected firms are all considered FFs because they have 50% or more of the shares owned by members of the family and/or a managing director who perceives the company as a family business

One of the following criteria is satisfied: (1) The family holds more than 50% of the board seats; (2) The CEO is a family member; (3) The proportion of shares that are directly owned by the largest family (measured by summing direct and indirect voting shares held by the controlling family through the control chain); (4) The voting rights owned by the family are higher than 10% of the total voting rights; (5) There is an excess of family control, calculated as the difference between the levels of family voting rights and the family cash flow rights

A firm is defined FF when: (1) An ultimate owner of a family nature, if the main shareholder, through the control chain, directly or indirectly holds more than 25% of ownership; (2) Family members must participate in the management team and/or in the board of directors; and (3) There must be at least 2 different relatives involved in the firm’s ownership, management and/or board of directors

A firm is defined FF when: (1) the founder and/or family members hold more than 20% of the voting shares; or (2) if the founding-family owns less than 20% of the voting rights they have to be represented on either the executive or the supervisory board

The dominant family has actual controlling power. Italian-listed firms are classified as FFs when the dominant family (or families) owns—directly or indirectly through sub-holdings—at least 50% of the voting rights or when the dominant family (or families), can appoint the majority of directors on the board, even though they do not own the majority of the voting rights

(1) A member of the founding family serves as CEO or chairperson (Family-managed firms); or (2) The founding family owns at least 5% of the firm’s stock (family-owned firms). When both the family and the founder are present as owners, the firm is considered family-owned

There is: (1) A percentage of family ownership, (2) The involvement of family members in the management; and (3) A number. of generations of family members involved. Furthermore, the trans-generational family control intentions and family commitment measures the family essence

2 or more firm directors have the same last name, or when the firm is named after 1 of its directors, which indirectly indicates the occurrence of family involvement in these firms. Also a firm is expected to be a FF if it has 2 or more directors residing at the same address, or if at least 1 of the directors resides at the firm address. Firms with more than 50% of the shares in the hands of family members are considered FFs. Firms with less than 50% of family ownership but whose managing director perceived them as FFs are, equally, considered FFs

The firm is both family-managed and family-owned: (1) Presence of at least 1 family member on the board of directors (i.e., a family with 1 or more members was required to occupy managerial positions); and (2) Family members must own at least a 10% of outstanding equity stake

There is increased involvement in the firm operations by at least 2 generations, or by siblings or extended family (such as cousins), this increased level of family involvement in the firm gives the family owners greater ability and stronger incentive to pass the firm to the next generation. Based on the level of family involvement they distinguish: (a) “strong group” including FFs with strong family involvement (i.e. 2 generations of the family or siblings and/or cousins are involved in the firm); and (b) “weak group” including FFs where only the founding family member (or non-related founders) and their spouses are involved in the firm

The founding family holds at least 25% of the firm’s voting rights at the ultimate level and/or a member of the founding family is represented in the management board and/or a member of the founding family is represented in the supervisory board

It is a SME with less than 250 employees, with families having the voting control and the majority of ownership (more than 50%). Furthermore, they consider whether these firms have 1 or more family members in managerial positions

The largest shareholder of the firm is an individual, family members and other firms controlled by family members. They then distinguish between family strategic control (measured by whether a family member serves as chairman of the board) and family operational control (measured by whether a family member serves as the general manager). They then group the sample into five types of firms: FFs with ownership control alone (type 1), FFs with strategic control but not operational control (type 2a), FFs with operational control but not strategic control (type 2b), FFs with complete management control (type 3), and non-FFs (type 4)

The controlling shareholder owns at least 5% of the firm’s shares and at least 1 of his relatives by blood (i.e. sharing the last name) serves either as CEO/chairman or occupies a position on the board of directors

There are last name relationships among the shareholders. The criterion used is the presence of at least 2 common last names among the shareholders. In addition, they include those firms in which a single person is the largest shareholder, even though he/she does not share a common family name with other shareholders. These criteria only identify potential FFs; it is from the combination of the components of family involvement in the firm that different configurations of FFs emerge. They use five components in this study: two components in the sphere of governance (family board and family chairman) and one component for each of the other domains: ownership (family ownership), management (family CEO) and succession

The largest family owns more than 50% of the shares using ultimate ownership. The alternative definition of FFs requires both that the controlling family owns more than 50% of the shares using ultimate ownership and that the CEO is a member of the controlling family

It is “controlled” (in terms of ownership) by families or individuals acting as first or ultimate owners. In this sense, whenever the family was the largest owner (directly or indirectly), holding more than 10% of the shares, the firm was classified as a FF. But if the large owner was a non-financial firm whose ultimate owner, identified by following the chains of control, was a family or an individual holding more than 10% of the voting rights, the firm was also classified as a FF

At least 2 shareholders have the same last name and hold a majority of the company shares. A family-owned firm is said to have married owners if the 2 leading shareholders have the same last name and are of different gender. Finally, a firm with non-married family owners occurs when the 2 leading shareholders have the same last name and are of the same gender

The following criteria are satisfied: (1) The majority of equity is owned by a family; (2) There are multiple family members involved in operations; and (3) The CEO or senior executive member recognizes the firm as a FF

If either or both of two conditions are satisfied: (1) The founder indicates that the firm was jointly owned with a spouse or other family member, a condition pertaining to family involvement in ownership; and/or (2) The firm employed 1 or more family members, a condition pertaining to family involvement within the organization

A firm is defined FF when: (1) At least 50% of the shares are family-owned and management is controlled by the family; or (2) At least 50% of the shares are family-owned and the company is not managed by a family CEO but the CEO perceives the firm as a FF

The ultimate controller is traced back to a natural person or a family linked by blood and affinity. The ultimate controller has to be the largest shareholder of the listed firm directly or indirectly. Ultimate control is considered to have been obtained if 20% or more of the voting rights are held via shares of the listed firm directly or indirectly or if a family member was recruited to be the chairman or general manager and holds 10% or more shares. If these two conditions are not met, the family should be the largest shareholder at a 10% cut-off level, and no second-largest shareholder should hold 10% or more of shares

There is a principal shareholder (representing a 10% or more ownership stake) represented by 2 or more related family members, at least 1 of whom was either an executive member of the top management team and/or a board member

The following conditions co-exist: (1) 1 or more members of the family (related through blood or marriage) control at least 30%, of voting rights; and (2) 1 or more members of the family are involved in the top management team

Letter C in Column 4 refers to the component approach, while letter E refers to the essence approach

The numbers in column 5 refer to the diverse group of definitions based on the component approach (see also Fig. 2.2), in detail: 1 refers to the group of definitions exclusively based on the ownership criteria; 2 refers to the definitions based on the management and control positions held by family members; 3 refers to the definitions based on the generational stage of the family firm; 4 refers to the group of definitions that are based on both ownership and management and control requirements; 5 refers to the definitions based on both ownership and generational stage criteria; 6 refers to the definitions based on management and control positions and generational stage requirements; and 7 refers to the group of definitions requiring to all of the criteria, that is ownership, management and control and generational stage

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